By Rick Ackerman
Europe’s all-too-predictable relapse into recession is gathering force, threatening not only the pipe dream of economic and political unity, but eroding grandiose illusions that have helped prop up the world’s financial house of cards. The unwillingness of France in particular to play by the EU’s — i.e., Germany’s — rules appears to have doomed the EU dream. The idea of a borderless Europe bound by a common currency and a shared desire to forever banish war from the Continent was a lofty one, but it was mired from the start in deeply rooted political animosities, grass-roots skepticism and bureaucratic overreach. Now these problems, along with a great many others, have turned the EU project into a Tower of Babel. A million pages of meticulously codified EU rules might as well have been written in cuneiform, so inscrutable and arcane have they become.
And useless as well. France’s prolonged economic death rattle has been made possible by running annual deficits larger by half than the 3% “allowed” by Brussels. And now, channeling de Gaulle for what could turn out to be France’s last hurrah, the French have flouted Merckel’s authority, and common sense itself, by proposing to remedy the problem by hiring more government workers and expanding tax breaks. Portugal, Greece, Spain and the other deadbeat rabble have been cheering them on, and why not? They think they have nothing to lose — that Germany is the only country with any skin in the game. Their folly is about to be laid bare, however, unless Germany gives in and allows Europe’s Central Bank to monetize the collective debts of Europe Fed-style.
Deflation at Critical Mass
This is simply not going to happen. Germany, and even the deadbeats, know it is too late for such remedies. With Germany sliding into recession, full-blown deflation is just a gram short of critical mass. That it will soon engulf the rest of the world seems more than merely plausible. We’re all in it together, as last summer’s failure of a middling Portuguese bank demonstrated. That episode nearly took down Europe’s banking system before incipient panic was quelled by the spinmeisters. Calm After a Bank’s Collapse in Portugal Could Signal Eurozone Resiliency was how the New York Times headlined the story, showing the dog-like obedience to the financial alchemists that has come to typify the Grey Lady’s coverage of economic events.
News of Europe’s economic problems has seemed to ebb and flow with interest rate fluctuations in sovereign debt. However, even the unschooled observer can see not only that nothing has changed fundamentally, but that economic conditions have steadily worsened. This is notwithstanding the rally in bond prices, particularly Spain’s, on the flimsy pretext that Europe’s supposed recovery was gaining traction. Only in a financial world ruled by desperation, and by yield-seekers delusionally oblivious to risk, could an economic basket case like Spain have returned to the debt market with a straight face. France’s money problems are of course orders of magnitude larger than Spain’s, and hubris alone will not pay the mounting social costs of a nation that has promised far more benefits and job security than it can afford. The statist dream that has galvanized Europe’s elites will die hardest in France, whose claim to great-power status in Europe has grown increasingly hollow over the last 40 years. A showdown between Germany and France looms, and the financial implosion it will set in motion, with no Marhsall Plan on the other end, promises to be worse economically than the lingering effects of the Second World War. Unfortunately, there is no other way to wrest Europe’s fortunes from the asphyxiating grip of folly, hubris and false promises.